BAWK CAPITAL ADEQUACY bY Barre| W: Doshew 19Chapter Ir ur vr vIT ‘ABLE OF CONTENTS Introduction Capital Standaris Definition Function of Capital Capital Trends Historic Overview Regulatory Environment Federal Reserve Board Comptroller of the Currency Federal Deposit Insurance Corporation Regulatory Measurements Uniform Rating System Capital Adequacy of Pacific Northwest Banks Summary and Conclusion Bibliography Page 16 - 1g - 20 = 230 - 30 - 42 - 44 - 15 17 20 29 4. 43 47TLLDSTRATIONS AND CHARTS » Ratio of Total Capital/Total Assets—1920-1978 Growth Rates for Total Assets and Total Capital Conventional Capital Ratios for Insured Comercial Banks va w Graphs—Capital as a Percent of Total Assets Cy Volume of Public Financings by Banks Graph—total Capital as a Percent of Risk Assets Capital Ratios by Bank Size Tangled Web of Bank Regulation Pacific Northwest Banks' Capital Ratios mo 4 J Pacific Northwest Banks’ Capital Ratios K Holding Company Stock Price Data L Pacific Northwest Banks’ Capital Ratios M Common Stock issued by Banks and Bank Holding Co. APPENDIX various Charts and Graphs showing historical trends. 10 n 12 14 15 19 32 34 36 38 40CHAPTER I is Introduction Capital Adequacy--A look at capital trends, the regulatory environ- ment, and pending capital standard implications for Pacific Northwest banks. ‘The purpose of this research report is to study the changing capital adequacy standards of the bank regulatory agencies and assess their impact on regional Pacific Northwest banks, ‘To accomplish this, an overview of current capital standards used by the Federal Reserve System (FRB), Comp- troller of the Currency (OC), and Federal Deposit Insurance Corporation (FDIC) will be presented as a framework within which to develop this paper. ‘The focus will center on historical capital ratio trends, the emerging uni~ form capital adequacy standards of 1979 and an assessment of the impact these standards will have on the regional Pacific Northwest banks. ‘The area of bank capital adequacy has long been a controversial and popular topic. Capital adequacy has been measured in a multitude of ways from complicated mathenatical formilae to gut feelings. A single best measure has not been uniformly agreed upon. This lack of agreement stems from the complexity of the situation, i.e., the interrelationship of capital, earnings, liquidity, asset quality, etc., and the different perspectives of those assessing capital adequacy (regulator, banker, or investor). ‘The regulatoryauthorities, led by the COC, are striving for such uniformity, however, and in the years ahead may impose stiff penalties on those banks not meeting their standards. For example, bank growth may be restricted through the non-processing of new branch applications and denial of further fixed asset investment. Also, banks may be forced to seek equity capital at a time 4 when the market is weak or sell debentures at high rates. Not only the troubled banks, but also the sound banks will be facing increased regulator pressure to establish a capital planning program that will provide capital to support the rapid asset growth of the recent years. ‘This may be oe true for Pacific Northwest banks who are enjoying very rapid asset growth.se CHAPTER IT Capital Standards Definition The first step in addressing the issue of capital standaris is to review the definition of bank capital. Generally, capital is agreed to be assets minus liabilities. However, even among the three federal bank regulatory agencies-—the Comptroller of the Currency (COC), Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve Board (FRB)—there is no uniformity on a definition, In particular, the FRB does not consider debentures or capital notes to be capital. ‘hey feel that debt is inappro- priate because it cannot be used to cover losses while a bank is solvent or q be used to maintain the bank as a going concern until earnings recover. The 0c and FDIC do, however, allow approximately one-third of a bank's capital \ to be long-tem debt. —_ } Whether or not debt belongs in the capital structure of a bank is a difficult question to answer. Subordinated debt does give some added protec- tion to depositors in the event of liquidation and generally contributes to the maintenance of confidence in the particular bank. However, by definition, the use of leverage always increases the risk to the bank; or in other words, if camnings are good, the use of leverage will improve the retum on equity; iff earnings are poor, the use of leverage will also emphasize the poor earnings. ‘he tough question ahead for the OCC and FDIC is when to stop per mitting debt and require equity capital. The answer to this question isa @ largely a fiction of the market for the largest banks in the country. For medium and small banks, there is no market scrutiny and the regulatory authorities provide that discipline. Debt capital is felt to have four primary advantages: 1. Debt serves several of the roles of capital; 2, ‘here is no dilution of earnings per share; 3. The payout to noteholders is tax deductible while dividends are not; 4, Access to the equity market is usually not affected. Conversely, three primary disadvantages are: 1. The required annual interest expense cannot be waived as dividends; 6 2. ‘The principal mist ultimately be repaid; 3. Debt is available to absorb losses only in the event of insolvency. Ideally, the OCC and FDIC would want debt issued to supplement equity when the equity market is not favorable or accessible. Often banks in ex- panding areas have good earnings and a conservative dividend rate but re~ tained eamings are insufficient to maintain capital adequacy. During stable economic periods, however, the regulators would want banks to reduce or re~ tire debt or at least reduce debt in relation to an expanding equity base. Capital thus consists of camon stock, preferred stock, surplus, re~ tained earnings, and capital reserves such as the contingency portion of thereserve for possible loan losses. In addition, the OCC and FDIC's belief that subordinated debt should be permitted as a form of capital is felt correct’ and is shared by the banking community. In defining capital as assets minus liabilities, the method used to value the assets will greatly affect capital adequacy.’ With todays high market rates of interest, a valuation of long - term securities and mortgage loans at current market price would result in stated capital of many banks being far below what is Uy oo published. In some instances, capital might even be negative. 1/ It should be noted that the Federal Bank Regulatory Agencies have often been at odds with the Securities and Exchange Commission over what generally acceptable accounting practices are for banks.Functions Of Capital In addition to knowing what accounts comprise the definition of capital one must understand the functions of bank capital, Nine such functions can be readily identified. First and most generally agreed upon as the primary purpose of bank capital is that it pro- vides a cushion for individual banks to absorb unanticipated losses and ultimately to protect against insolvency. Other reasons are as follows: (2) to maintain public confidence in the banking system; (3) to maintain the confidence of and protect the interests of uninsured depositors and creditors; (4) to protect the FDIC insurance fund; (5) to provide the opportunity for the orderly resolution of a problem bank situation; (6) to provide permanent funds for financing premises and other fixed assets necessary to the business of banking; (7) to provide a base on which banks can leverage them- selves through deposits and other purchased funds; (8) to provide for the orderly financing of the economy and individual borrowers; and (9) to serve as a market and regulatory guideline for bank asset expansion. While these functions of bank capital are probably not all inclusive, they are in unison with historical and modern functions of capital. 2/ 7 “the historical function of bank capital is typlified by Roland I. Robinson, The Management of Bank Funds, New York: McGraw- Hill Book Company, Inc.; ToSL p33 asi "th Banking, the function of capital is primarily that of a guarantee fund." 7CHAPTER IIL Capital Trends Historic Overview Bank capital ratios have been declining since the early 1800s.2/ ‘The most rapid decline in capital occurred from early 1800 to 1900 when capital funds to total assets fell from the 70 percent range to about 20 percent. By 1920, this ratio had fallen to around 13 percent and today stands at around 7.5 percent. This decline is seen by Illustration A below. Illustration A Ratio of Total Capital/Total Assets ({ All national banks 1920 - 1978) 1920 13.0 1965 7.9 1974 6.7 1930 13.5 1970 7.4 1975 6.8 1940 8.9 1971 1a 1976 7.0 1950 6.5 1972 7.0 1977 6.9 1960 7.9 1973 6.8 1978 6.8 Source: Comptroller of the Currency, NBSS Peer Group Data and James C. Baker, "The Bank Capital Adequacy Problem, Analysis v and Up-date", May 6, 1976 p.15 In reviewing this trend, one might incorrectly assume that the level of bank capital is related to the number and magnitude of bank failures. During 1930 to 1933 there were 9,106 bank failures yet, the total capital to total asset ratio continued to decline from 13.5 percent in 1930 to 8.9 percent in 1940. similarly, 3/ George J. Vojta, "Bank Capital Adequacy", February, 1973 p.8-8- the failure of U.S. National Bank of San Diego in 1973 with nearly a billion dollars in deposits and the failure of Franklin National Bank in 1974 ( the largest bank to fail in U.S. history ) failed to show any significant increase in capital ratios in following years. Despite only 13 bank failures in 1975 and four in 1976, the size of the previous failures did however create concern among the regulatory agencies.4/ this concern has been mitigated over time by the FDIC track record in paying off depositors.2’ Also, there seems to be an understanding that no amount of capital can save a bank from defalcation, fraud, or poor management. on bank capital adequacy during the 1973 to 1976 period. Please 4/ This concern is evident from the volume and content of articles vA see the bibliography for a listing of sources used. 5/ From 1934 through 1968 the FDIC made disbursements sufficient for 99.7 percent of the depositors to be fully paid off. Distributions since this date have and are expected to approximate these averages. Robert E. Barnett, Asst to the Chairman, FDIC;"Anatomy of A Bank Failure” The Magazine of Bank Administration, Vol 48, No 4, April 1972 p.20Growth Rates for Total Assets and Total Capital Total Assets agae 7 6 Source: Senate hearings, Comm May 1978, p. 73. -9- ILLUSTRATION B % 4 YearFigure PER CENT Illustration ¢ = PER cent 39 25) 15 1d aia isk assets oat Basele ass cash ane ‘US. government ee Octane] Capa io ‘noetigu esses ‘otal aseete uss cash U8. government secivhies Sue 8 years ries) al aad Copia depots Capital to total assets 3 425 20 8 10@ Illustration D TOTAL CAPITAL AS A PERCENT OF TOTAL ASSETS, INSURED RONMENMBER BANKS, SELECTED SIZE CATEGORIES, 1972-1977 Percent Percent ‘Bank Deposit Size Categories: —— over #1 Bitton 500 Mition to $1 Bilion Inder #100 Mion 0 wo ove Fe poe nrc Caen TAMAS WAITS TIBI WIBVITS WIAA WIRTTT? © en TOTAL CAPITAL AS A PERCENT OF TOTAL ASSETS, STATE MEMBER BANKS, SELECTED SIZE CATEGCRIES, 1972-1977 Percent Percent ‘Bank Deposit Size Categories: Over $1 Bion = $500 Milion to 61 Bilion = Under #100 Mition ip ee rece cee eee [eeeeceeee cece [oereseeeeTLEE TRAVTE W2IBWTS 12/31/74 W2/BIT 12/31/76 12377-12- In 1978, all national banks sustained an average asset growth rate of 12.9 percent and this compared to 8.1 percent for the five year period ending 12/31/78. Also, in 1978, such banks improved earnings efficiency or return on average assets (ROA) to ~76% compared with a five year average of .70%. Internally generated capital or retained profits grew at a rate of 8.8% of assets in 1978 versus the 7.78 of 1977 and a five year average of 8.9%. This internally generated capital of $4.1 billion is contrasted with a total of $374 million in common equity capital raised externally by commercial banks in 1978. Another $260 million in preferred equity was raised in the capital marketplace by banks in 1978. To establish a perspective on bank capital financing trends, the following table shows the volume of public financing by banks and bank holding companies since the beginning of 1971, classified by the various categories of securities issued. ILLUSTRATION E Total Volume of Public Domestic Financings by Banks and Bank Holding Companies* Intermediate Long Term Convertible Preferred Common Term Debt __Debt Debt Stock _ Stock Total 000's omitted—————_—___ 1971 $585,000 $ 290,000 $ 355,000 None $ 101,793 $ 1,331,793 1972 1,480,000 456,000 55,000 None 207,873 2,198,873 1973 95,000 460,000 210,000 + None 87,173 852,173 1974 675,000 490,000 None None None 1,165,000 1975 610,000 150,000 420,000 $ 75,000 33,750 1,288,000 1976 660,000 450,000 None None 342,525 1,425,525 1977 85,000 1,410,000 None 225,000 157,031 1,877,031 1978-6ino. 380,000 None 50,000 © 67,500 219,647 117,147 “The figures presented include all debt offerings of $20,000,000 or more and stock offerings of $5,000,000 or more, but the figures are exclusive of $1,160,000,000 of floating rate note financings completed in 1974. Source: "Bank Financing Review-1978", Merrill Lynch, p. 3-13- Therfigures in Illustration E reflect a number of different trends in capital financing. First, straight debt has been the predominant form of external capital addition. Second, the utili- gation of intermediate term debt rather than long term debt has been influenced more by the absolute level of long term interest rates and ease of market access than by the differential between interest rates for intermediate and long maturities. Third, inter- mediate debt currently appears to be considered more as a funding mechanism to match maturties and rates of fixed rate term loans than as a capital component. Fourth, the issuance of preferred stock has gained an increased role as a capital component because of the focus on stockholders equity as the most relevant measure of capital. Finally, common stock financing has been undertaken at lower market multiples than previously because of increased emphasis on capital adequacy and the desire of stronger institutions to build equity bases for future growth. In contrast, weaker insti- tutions either cannot achieve market access or have such an unfavorable demographic or competitive climate as to make v additional capital unnecessary or unattainable. £/ The debt build-up which has taken place in recent years has outpaced the increases in equity capital arising through retained earnings and equity financing. The widespread difficulty of raising external capital during the past five years suggests that there will be further efforts by medium-sized banks to raise equity over the near term if favorable market conditions continue. Also, the current high levels of debt in many banks probably means that equity will be sought in the period ahead. 6/ "Bank Financing Review - 1978", Merrill Lynch, p.4ITAL CAPITES £.S A PERCENT OF TOTAL ASSETS, TOTAL CAPITAL AS A PERCENT OF TSK ASSETS, \TIONAL BAIS, SELECTED SIZE CATEGORIES, TWATIONAL BANKS, SELECTED SIZE CATEGORIES, 72-1977 1972-1917 iz cent Percent Percent Pere ne 1 z neitteien 48 Setanta sob 7 thee, neeereneneeenenss 7 eoeeeee eee een ot ueeere™ -|3 - 46 Bh : 4 44 5 5 i 4a ab -\4 3k -|3 ~ Bonk Deposit Size Categories: eae Bonk Deposit Size Categories: Over #5 Bion Pal over #5 tition : saa $800 tition to $1 Bion see #500 ion t0 #8 Bion ‘eam ees Under $100 Mion fae Under $100 Mifion ae oe i L 1 L L r RAV 12/773 WAI WAS W376 127317) Year \ ! L L L H iDBT2 TRIAS 128174 WRITS WAIST ° Yewone muion MUL Btn TL Mitien Date . x ° " same “ o uv H=73 i wT bqutty & cit caps aL : Hoey Sr i uh : Te if id te 44 a 7? r i » 8 a 2 g g peer nene s a 3 # q a he : - . Source: Sevate Nenes-16- Chapter IV Regulatory Environment Federal Reserve Bank The three federal bank regulatory agencies are largely re- sponsible for establishing acceptable bank capital standards. Accordingly, it is beneficial to understand each agency's in- fluence or realm of supervision. ‘The FRB supervises state-chartered member banks, Edge Act corporations and bank holding companies, in addition to control- ling the reserves and other operating features of its member banks. The examination function of the FRB extends to approxi- mately 1,000 state member banks and 1,800 holding companies. As of December 31, 1976, these member banks and holding companies held approximately 20 and 66 percent of all commercial bank de- posits respectively. By supervising member banks, their subsi- diaries and their holding companies, the FRB has a major voice in establishing capital standards and enforcing them. They possess several key supervision tools with which to strong-arm their con- stituency into line. These supervisory tools include the use of corporate leverage on applications filed both by the state member bank and the holding company and the use of administrative pro- ceedings such as formal agreements with the institutions for cease and desist type actions. Unfortunately, the rapid conversion of national and state member banks out of the FRB System continues-17- y/ to weaken FRB's role in the area of capital adequacy. Bank deposits held by member banks dropped from 77 percent to 72 per- cent over the last five years, and 254 banks have left the sys- a tem. Also, in response to Senator Proxmire's comment of "You point out that a national presence in bank supervisory and regu- latory functions becomes diluted as the Fed loses members,” Chairman Miller said: The Federal Reserve is responsible for ensuring that the nation's payments media are "elastic," func- tioning efficiently and effectively to support the nation's commerce » . . Elimination of both the Federal Reserve and the Comptroller clearly dilutes a national presence. Moreover, the Federal Reserve's "national presence" in bank supervisory and regula- tory functions cannot be readily separated from its job of conducting national monetary policy. Regula- tory changes can have important implications for mone- tary policy . . . for example, rules that require banks to raise their capital ratios increase the demands on capital markets by banks and may also slow the rate of growth of bank credit, or reduce the availability of bank funds to particular borrowers. In general, a Federal regulatory policy involving both the Federal Reserve and the Comptroller promotes a more equitable and balanced banking structure and also fosters more effective coordination of monetary and regulatory policies. G. William Miller, Chairman of the Federal Reserve Board; in xesponse to testimony questions before the Senate Committee on Banking, Housing and Urban Affairs, June 9, 1978, p. 195. 8 & og. wirtiem Miller, Chairman of the Federal Reserve Board and Philip E. Coldwell, Member of the Federal Reserve Board; in testimony before the Senate Committee on Banking, Housing and Urban Affairs, May 25, 1978, p. 6.=18- e Comptroller of the Currency The OCC charters and supervises national banks and their subsidiaries. As of September 31, 1978, there were 4,596 national banks which held 57.1 percent of all commercial bank assets. This reflects a decrease from December 31, 1977, when there were 4,656 national banks. Despite the decline, the Occ probably remains slightly dominant over the FRB in influencing bank capital adequacy for five reasons. First, it continues to supervise the preponderance of bank assets. Second, it supervises the largest banks. Third, it has the authority to examine holding companies and has been increas- v ing its occurrence of doing so. Fourth, the Comptroller of the @ currency has been elected Chairman of the newly-created Federal Financial Institutions Examination Council (FFIEC). This FFIEC was created as Title X of the Financial Institutions Regulatory and Interest Rate Control Act which was signed by the President November 10, 1978. Fifth and final, the OCC appears to be ahead of the other agencies in the area of computer tracking and exam- ination procedures. Specifically, the OCC pioneered the National / Bank Surveillance System (NBSS) to monitor changes in an individ- ual bank's financial condition as compared to a peer group of similar banks. Also, in 1976, the OCC started implementing re- vised examination procedures which were updated from the histori- cal asset type of review that the three federal bank supervisory agencies have used. This step ahead makes its capital related @ = aecisions carry more credence.-19- Tllustration # ‘THE TANGLED WEB OF BANK REGULATION National banks Federal government IComptro of the Currency Federal Reserve U If s PA 7 Federal Deposit lnsurance Comp. Source: Hearings on Financial Stectare ond Regulation ear thr Subcom. on Financia nti Ion ofthe Senatt Connon Banking, Messing and Urban Affi 938 Cong, a Sexe 619 (1975),=20- As in the case of the FRB, OCC also has several primary e supervisory tools with which to enforce its capital standards. These include the use of moral suasion, corporate leverage on application for branches, title changes, mergers, relocations, etc., formal agreements and cease and desist orders. Of course, the report of examination always remains an effective tool for all federal bank supervisory agencies. Federal Deposit Insurance Corporation The FDIC regulates insured nonmember state banks. All FRB member banks are insured by statute but their primary supervision is left to the OCC and FRB. As of December 31, 1977, the FDIC supervised approximately 8,700 commercial banks and 300 mutual e savings banks. These 8,700 commercial banks held 19.5 percent of V total commercial bank deposits. As can be seen from the above figures, the FDIC supervises the most banks, nearly 40 percent of all commercial banks, but does not supervise very many large banks. In fact, the FDIC supervises no banks with assets over $5 ¥ billion and ‘only supervises 15 banks with assets between $1 and $5 billion. In comparison, the OCC supervises 9 banks in the over $5 billion asset range and 59 banks in the $1 to $5 billion range. Nevertheless, the FDIC's views on capital adequacy are widely held and accepted since they parallel those of the other two agencies. vf ~ annual Report, 1977, Comptroller of the Currency, and Senate Committee on Banking, Housing and Urban Affairs, May 25, 1978.It should also be noted that the FDIC joins both the FRB and OCC as a member of the FFIEC and similarly sits on the Interagency Supervisory Committee and Interagency Coordinating Committee which are designed to promote uniformity and coordination of bank supervisory matters among the federal regulators. The FDIC, under the FDIC Act, also has supervisory remedies and tools with which to enforce and ensure capital adequacy in insured banks. These enforcement tools parallel those of the occ and FRB. In the past two years, their use of the cease and desist type action has been increasingly aimed at correcting in- adequate capital and similar criticisms. Of the 52 cease and desist orders issued in 1977, up from 26 in 1976, the eight most common deficiencies mentioned ee in order of importance: 1. Inadequate capital in relation to the kind and quality of assets. 2. Inadequate provisions for liquidity. 3. Failure to diversify portfolios, resulting in risks to capital. 4, Extension of credit to insiders and bank affiliates who are not creditworthy, sometimes at preferred rates. 5. Weak and self-serving management. The Bank Board Letter", p. 2.~22- 6. Hazardous lending practices involving extensions of credit without adequate documentation as for the pur- pose of speculation in real estate. 7. Excessive portfolios of poor-quality loans in relation to capital. 8, Violations of the Fair Credit Reporting Act and Regula- tion Z. The list is valuable because it shows the relative importance of what the FDIC considers to be unsound banking practices. Likewise, the OCC issued 56 formal Administrative Actions, in 1977, up from 33 in 1976. Of these actions, over 52 percent Ly involved inadequate capital and or capital planning. v ri7 Senate Committee on Banking, Housing and Urban Affairs, May 25, 1978, page 454 - 471.-23- Chapter V Regulatory Measurements The measurement of capital adequacy in financial institu- tions is very complex. Arguments over what is or is not ade- quate capital are frequent between banks and banking regulators. These banks often claim that their efficiency and decision mak- ing discretion have been severely diminished by required capital imposed on them by regulators ignorant of the facts or using in- adequate theories and understanding of how banks control risks. Uniform Rating System In May 1978, the three federal bank supervisory agencies announced a new Uniform Interagency Bank Rating System. This Rating System is based upon an evaluation of five critical dimensions of a bank's operations that reflect in a comprehen- sive fashion an institutions financial condition, compliance with banking regulations and statutes and overall operating soundness. The specific dimensions that are to be evaluated are the following: capital adequacy; asset quality; management/ administration; earnings and liquidity. Capital adequacy is rated (1 thru 5) in relation to: (a) the volume of risk assets; (b) the volume of marginal and inferior quality assets; (c) bank growth experience, plans, and prospects; and (d) the strength of management in relation to (a), (b), and~24- (c). Th addition, consideration may be given to a bank's capital ratios relative to its peer group, its earnings retention and its access to capital markets or other appropriate sources of finan- cial assistance.” Despite the Uniform Interagency Bank Rating System, the FRB, occ, and FDIC do not necessarily place the same weight on the five capital evaluation criteria. (1 - volume of risk assets, 2 - volume of marginal quality assets, 3 - past actual and forecasted growth, 4 - management strength and 5 - capital ratios, earnings retention and accessibility to the capital markets.) In addition, the OCC in its evaluation of capital adequacy, also looks at the quality and character of ownership, the size and nature of the deposit structure and the banks capital planning Begeeeehee: y Each agency recognizes that banks are sufficiently dissimilar from each other to have any one best measurement criteria. Never- theless, there does seem to be a minimum level where all three agencies would unanimously agree that capital is inadequate. This agreement leads me to believe that ratio analysis remains as the first determinant of capital adequacy. This is not bad as long as the short comings of ratio analysis are not overlooked. I “News Release, Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Federal Reserve Board. Ly Comptroller's Handbook for National Bank Examiners, Section 303.=25- As we saw how the historical trends of the total capital/ total asset ratio, the minimum requiredahouhtof capital changes over time. In the last decade there seems to be a Regulatory concensus that capital does not have to be so great as to enable a bank to absorb the strain of total economic collapse or to accomodate a wholesale run on deposits at any given moment. Rather, capital should be adequate to permit the bank to operate as a viable institution, capable of responsiblyi* moving funds and providing related services while protecting against unantici- pated adversity.” When capital is deemed inadequate by the Regulatory agency, however, their efforts are often necessarily opposed to the economics of capital allocation and sometimes to the interests of shareholders. . Regulatory agencies generally prefer retention of earnings and sale of common stock as the primary ways to augment capital. Unfortunately, ideal conditions do not normally exist for the sale of common stock when it is requested. The sale of new stock should ideally be effected when the price is at or above book value and when the price/earnings ratio is high. Addition- ally, a stock sale usually dilutes earnings per share, increase® dividend payouts, reduces the bank's ability to go back into the / STA creer eee eee "Comptroller's Handbook for National Bank Examiners, Section 303. Also, the PDIC Manual of Examination Policy closely parral- lels this: If any generalization may be made, it is that the capital of any given bank should be sufficient to support the volume, type and character of the business presently conducted, provide for the possibilities of loss inherent therein, and permit the bank to continue to meet the reason- able credit requirements of the area served.~26- equity market in the near future, and may dilute the ownership of shareholders who do not exercise preemptive rights. The impor- tance of price per share, preemptive rights and source of funds is exemplified in the OCC Corporate Policy Statement and Procedures. “offerings of common stock should be at a fair price. When the stock is actively traded, the market value should be used as a primary indicator of a fair offering price. When the stock has a thin or control- led market, earnings and book value per share should be given greater consideration than market value in determining a fair offering price.” "If a preemptive rights offering is not made, the proposal should be re~ viewed to ascertain that no existing shareholder . . - or other persons are favored to the detriment of others.” To avoid the unfortunate circumstance of being forced into the market, management must adequately plan for the bank's con- tinued capital adequacy. Retained earhings historically repre- sent the largest single source of new capital to banks. Only about 10 percent of all banks add capital funds from external sources in normal years. In 1978, a total of $374 million in common equity capital and $260 million in preferred equity was raised by com- mercial banks. ‘This $374 million in external equity was the sy largest amount raised since 1970. “Bank Financing Review, 1978", Merrill Lynch, White Weld capital Markets Group. p. 3.-27- With inflation runningwthe low double digit figures during the past several years, capital planning has taken on even more importance. The Regulatory agencies are placing increased emphasis on monitoring asset growth rates in comparison to equity le/ capital growth rates. Management has a very tough job in either holding down the rate of asset growth, often to a negative rea) rate, or increasing the equity capital growth rate so as not 17/ to be penalized by the regulator. John G. Heimann, Comptroller of the Currency, in testimony before Senate Committee on Banking, Housing and Urban Affairs on May 25, 1978, said: where is no magic formula for determining bank capital adequacy . . . The capital growth of the nation's banking system has simply not kept pace with the expansion of the resource base, particularly risk assets . . . We believe there may be a substantial shortfall in bank capital by the early 1980's if asset growth patterns are maintained at historic levels and if internally generated capital through retained earn- ings is not both increased and supplemented by external sources. ay —" whe feeling that growth in bank capital will have to closely approximate growth in assets has been around for over 65 years ae and is typlified by John Skelton Williams, Comptroller of the Currency in 1914 when he wrote the following in the "Annual Report" that year: The view is held by many practical bankers and exper- ienced economists that it is not sound banking for an active commercial bank to be permitted to hold deposits in excess of ten times its capital and surplus. I am firmly impressed with the correctness of this view, and respect fully recommend to the Congress that the national bank act be amended so as to provide that no national bank shall be permitted to hold deposits in excess of ten times its unimpaired capital and surplus. Perhaps it might be wiser to make this limitation eight times the capital and surplus.~28- With our inflationary growth continuing, the issue of capital adequacy will undoubtedly heat up again in coming months. The Senate Committee on Banking, Housing and Urban Affairs is scheduled to hold hearings in May 1979, on the condition of the banking sys- tem. An important topic discussed will undoubtedly be bank capital adequacy. In times past, the three primary federal bank regulatory agencies, OCC, FRB, and FDIC have each presented different approaches and findings on the issue of capital adequacy. This year, however, these agencies are expected to present fairly consistent testimony in regards to how capital adequacy is appraised. As previously mentioned, an Interagency uniform bank rating system has been an- nounced for banks, trust and EDP departments. This rating system also established uniform criteria on which to rate bank capital adequacy. The next step for the Regulatory Agencies is to establish capital policies and standards. These standards would be a takeoff from the minimum capital requirements for chartering a new bank. Presently, statutory capital minimums are imposed on numerous banking activities including: lending, investments, fixed asset expansion, branching, etc. As the agencies become more sinitar, common standards will evolve. It should be noted here that con- solidation of the three federal bank regulatory agencies has failed to pass Congress but the FFIEC did. This council is charged with establishing uniform regulatory, examination and supervision Z policies. It represents an improved version of the Interagency 18, ‘he present relationships between the FRB, OCC, and FDIC are complicated by their overlapping and parallel responsibilities. see Illustration H.-29- Supervisory Committee and will undoubtedly have as one of its projects the establishment of uniform capital standards. All three agencies have either done or are finishing now, research and study on what a capital policy should be. Moreover, they have established an interagency task force to draft uniform policy standards. In specific banking instances, the agencies often coordinate their supervision of a banks capital problem to insure that it is acceptable to each other. Consequently, the historical isolationism practiced by the FRB, OCC, and FDIC is disappearing. Unfortunately, the Uniform interagency capital standards were not established by the due date of this paper. Neverthe- less, certain aspects of these standards are predictable. First, the agencies have recognized that capital adequacy can not be determined without considering the specific character- istics of the individual bank and its relationship to peer banks. Second, emphasis will probably be ph&ced on monitoring asset growth versus capital growth. Third, the acceptance of sub- ordinated debt as capital will be reappraised and probably include more stringent requirements. New requirements might include longer maturities, required convertibility or sinking fund and a lower acceptable outstanding volume. Fourth, equity capital minimums in relationship to total assets might be established. and Fifth, banks without adequate capital planning and augmenta- tion will be subjected to increased regulatory pressure.=30- Chapter VI Capital Adequacy of Pacific Northwest Banks To determine what effect uniform capital standards would have on large Pacific Northwest Banks a profile for all banks in the State of Washington and Oregon with over $1 billion in assets was made. Seven banks were selected, five from Washing- ton and two from Oregon. The selected institutions are as follows: Name and Location Average Assets 12/31/78 Seattle-First National Bank $6,283MM Seattle Rainier National Bank 3,592mm Seattle Pacific National Bank 1,4054M Seattle Peoples National Bank 1,2074M Seattle Old National Bank of Washington 21,0270 Spokane First National Bank of Oregon 3,898MM Portland United States National Bank of Oregon 3, 536mm, Portland Of these institutions, only one is not affiliated and owned by a holding company, Peoples National Bank (Peoples), Seattle. The others are divided between one and multibank holding companies. a-31- The largest of which is Western Bancorporation. Both Pacific National Bank (PNB) and First National Bank of Oregon (FNBO) are affiliates of Western Bancorporation. Seattle-First 7 National Bank (SFNB), Rainier National Bank (RNB) and United States National Bank of Oregon (USNB) are all wholely owned subsidiaries of one bank holding companies. The remaining bank, Old National Bank of Washington, (ONB) is owned with First National Bank in Spokane by a (two) bank holding company. ONB comprises the preponderence of the holding company's assets. In appraising the capital adequacy of these banks individu- ally and as a group, I used the years 1974 to 1978 as the data base. By using these five years, a trend was established in several cases. Additionally, 1974 was felt to be a good start- ing period as it is typically described as a year of low capital and heavy losses in the banking industry. As a comparison for these banks, I also calculated similar ratios for two peer groups of similarly sized banks. Peer Group 1 was made up of 24 banks having assets in excess of $5 billion at December 31, 1977. Peer Group 2 was comprised of 104 banks having assets between $1 and $5 billion at December 31, 1977. As can been seen on Illustration I, all the banks are leveraged. In relation to assets, Peoples is the most highly leveraged, with SFNB being second. The least leveraged is FNBO. This comparison of debt to assets is complimented by also compar- ing total borrowings to total capital and subordinated debt to equity capital. /Tllustration I Average Assets |Total| Total Asset Growth Rate Equity Growth Prom Retained Faimings 12/31/78 in $MM! Equity Sub Debt | 1974 1975 1976 1977 1978 | 1974 1975 1976 1977 1978 Seattle-First NB | 6,283 376 60 16.5, 0.3 14.5) 14.9}18.0} 4.1) 16.1] 12.8) 10.8) 12.8 Rainier NB 3,592 206 10 7.2 9.0, 9.8/ 15.6] 16.4 | 10.6] 12.9} 12.3] 10.4) 12.3 Pacific NB 1,405 78 10 9.2} 9.0} 10.4/13.6}18.4 | 8.2) 7.5) 9.6, 8.6 12.5 Peoples NB 1,207 58 16 9.5) 12.4] 4.4] 25.6]12.9 | 5.7] @.8) 9.1) 14.5) 15.5 Old NB of WA 1,017 55 2 1g.1) 12.1] 28.2} 18.6/14.7 | 8.7) 12.3) 13.2) 10.9] 9.3 First NB of Oregon} 3,898 216 50 1.1] 14.0] 7.0)15.5)26.8 | 9.4] 7/6] 7.9] 8.4) 9.2 US NB of Oregon | 3,536 220) 9 7.7] 9.0} 3.8)14.8] 5.5 |17.1)13.9/ 10.2/ 10.7] 12.3 Peer Group 1 (Over $5 billion) | ----- -- - 13,9] 1.5] 7.3/15.2]13.9 | 8.0] 7.2) 7.7] 6.7] 7.3 Peer Group 2 ($1 to $5 billion) | ----- -- - 6.3] 4.3] 7.8/11.5/13.8 | 7.7| 6.8] 6.6{ 6.01 7.3 a v-33- Total borrowings include Deposits and Federal Funds as well as other borrowings. Illustration J shows this calculation. The most dramatic trend is shown by SFNB's drop from 20.9 in 1974 to 14.9 in 1978. In comparison to peer group 2, only USNB, FNBO, and SFNB exceed or approximate the peer group average. ‘This indicates that the other banks may have higher than average bor- rowings or lower than average capital. Further analysis indicates that for the most part, both conditions are true. When comparing subordinated debt to total capital USNB is the most leveraged with debt equalling 40.9 percent of its equity capital. The next most leveraged are: Peoples (27.6%); PNBO (23.1%), SFNB (15.98); PNB(17.8%); RNB (4.9%) and ONB (3,68). When these three ratios are compared, it becomes clearer that no one bank stands out as being over leveraged, but USNB, Peoples, and FNBO are substantially leveraged. It must be remembered that banks are among the most highly leveraged of all firms. Many of the arguments over bank capital arise from the banker's assumption that he will be better off if he can increase this leverage even more. The theory of capital pie structure and financial leverage indicates that this will be 7 true primarily when debt issues bring major tax advantages or = when high information or transaction costs make issuing of stock or selling of other assets expensive. Whether or not increased leverage is more efficient for banks has not yet been proven. vIllustration 3 Equity Capital to Total Assets| Total Capital to Total Assets |Deposits, Fed Funds, and Borrowings to Total’ Capital 1974 1975 1976 1977 1978 | 1974 1975 1976 1977 1978 |1974 1975 1976 1977 1978 Seattle First NB] 4.3 | 5.0/ 5.1| 4.9 | 5.2 4.3 [5.0] 6.3] 5.9 | 6.2 |20,9]17.7/14.2]15.2/14.9 Rainier NB 4.4} a7] 4.9) 4.7 | 5.2 4.4 [5.1] 5.3| 5.0 | 5.5 |20.9/17.8/17.4/18.6]/16.4 Pacific NB 5.4| 5.4] 5.5) 5.3 | 4.9 5.4 [5.4] 5.5) 6.0 | 5.5 |16.8/16.8/16.8}15.3/16.1 Peoples NB 5.1] 4.9] 5.2] 4.3 | 4.4 5.1 | 4.9} 5.9] 6.0 | 5.7 |17.4}18.9]15.6]15.3}16.2 Old NB of WA 5.7 | 5.6] 5.6| 5.2 | 5.0 5.7 |5.6| 5.8| 5.4 | 5.2 |16.2/16.3]15.9/17.2/18.0 First NB of Or 5.8] 5.5] 5.6] 5.3 | 4.9 7.7.|7.2| 7.2] 6.6 | 6.0 [12,3/22.5/22,4{13.6/24.5 US NB of Oregon | 4.8| 5.0] 5.5] 5.3 | 5.7 6.5 | 6.6] 7.1] 6.7 | 8.0 |13,6|13.6}12.9[13.7/11.3 Peer Group 1 4.3 | 4.7] 4.9] 4.6 | 44 4.6 | 4.9] 5.3) 5.0 | 4.8 [20,.3]16.8/17,5[18.3]19.2 Peer Group 2 5.9} 6.2) 6.4] 6.1 | 5.8 6.5 | 6.8] 7.0] 6.8 | 6,5 |14,0)13.5)13,3]13.7]14.3 \ i=35+ Because investors can hedge and arbitrage, they tend to value the debt and equity of each institution in accordance with the amount of risk they perceive the institution to have. A bank cannot change its value by leverage except for possible tax benefits or information deficiencies. The risk of its assets can be changed, however, and thus it can alter the price that its assets will sell for. Because of this, it is felt that leverage can alter the risk and consequently the price of common stock. Whether, USNB's stock price has suffered because of its higher percentage of debt in the capital structure (29 percent of total capital on 40.9 percent of equity capital is debt) and resulting higher risk perception is not clear. As seen on Illustration K. US Bancorp has a better market price than either SFNB or RNB. The correlation between price and earnings per share, however, appears to be very high. US Bancorp has the low- est current yield of the four holding companies shown, yet the second highest price and earnings per share. Earnings seem to be the key. Also, despite the higher leverage, USNB is perceived to be a very sound institution, possessing no more than the normal amount of risk. I£ the capital standards are established and do call for less debt, with longer maturities and sinking funds er convertibility, the Pacific Northwest Banks will probably be affected as a group more than other banks. The reasons for this are several. First, as a group these banks have experienceda very fast asset growth rate during the past five years. However, theix equity growth rate has not kept pace. This relationship is presented in Illustration EZ. Compared to peer groups 1 and 2, however, both asset and equity growth rates have generallyTllustration K Earnings per share 1977-78 Latest Indic Range Current (1979 Pull Year 1976 1977 12 months Dividend High Low Yield Estimated EPS SeaFirst Corp 2.70 3.07 3.52 +96 3000 22 3.17 4.10 -- 4.30 Rainier Bancorp 2.87 3.29 3.59 +92 27.0 19 3.49 4.30 -- 4.50 US Bancorp 3.01 3.51 3.96 1.00 35 02a 3.10 4,60 -- 4.75 western Bancorp 3.78 5.04 6.00 1.70 420027 4.04 5.05 == 5.20 ~36- source: "Bank Stock Weekly", Solomon Brothers, 8/11/78 and "Bank Market Service", First Boston, Vol. 5, No, 3/27/79. 8-37- exceeded the averages. Since equity capital cannot and has not (See Illustration 3) kept pace, these banks may be forced to float increasing amounts of debt. Without proper timing and planning, debt capital augmentation can be extremely costly and substantially penalized earnings. Fortunately for mostf the Pacific Northwest banks, they belong to a holding company which could sell the debt and downstream the proceeds as equity. However, because the new capital standards would be uniform among the agencies, similar controls might be imposed on holding com- pany debt. Of course, the regulators have control over dividends and fees as a way to restrict debt servicing at the holding com- pany level by the bank. The increased emphasis placed on equity capital by the Regulators will undoubtedly create many disagreements between Regulator and banker. As a group, Pacific Northwest banks remain below peer averages for equity capital. Bllustration 3 shows that only SFNB has exceeded its peer group averages for equity captial to total assets. while none of the other six banks exceed their peer group averages, USNB closely approximates them. Three banks, Peoples, PNB, and PNBO, stand out as being far below peer averages. In all these cases, a decreasing trend is noted over the period 1974 through 1978. If a minimum, equity to asset ratio of 5.0 percent were established, these three banks would have to raise $14 million in equity. However, if they had to bring their equity up to the peer group average of 5.8 percent of assets, they would have to raise $72 million in equity. This equates to an increase of over 208 from existing levels.-38- Seattle First NB Rainier NB Pacific NB Peoples NB Old NB of WA First NB of Oregon| US NB of Oregon Peer Group 1 (over $5 billion) Peer Group 2 ($1 to $5 billion) Illustration L Return on Average Equity Return on Average Assets Risk Assets/Equity Capital (x) 1974 1975 1976 1977 1978| 1974 1975 1976 1977 1978 1974 1975 1976 1977 1978 8.7/19,1]14,6/14.2/15.3] .4] .9) .8] 47] 8 14,9]13,6] 13,2) 13.7) 13.2 13,6/15.2]14.1)13.9)14.2 Fira fesaeeea uated faueccd 13.7| 13.9] 13,5] 15.2] 13.6 8.9) 9.2/10.8)12.0]16.4] .5| 47 7 12,7] 12,3} 12,0) 11.7] 14.2 8.3] 10.6/11.0]/18.2/18.3/ .5} .5} .6] .8! 8 10.8] 11.2/ 10,9} 14.9] 14,3 12.8/14.8]15.1]14.0]12.2] .7/ .9 8 12.0} 12.0] 12.4) 12.3] 12.5 14.2)12.2]12.0)12.5/13.6 7 7 11.0} 10.2) 10.0] 11.2) 13.0 18.6] 17.8/17.2/18.2]19.8 o| 49 1.0 14.8) 12.3] 12.9 12.2) 12.2 13.1)13.6{11.4)11.2/12.1} 66] 66 .5) WA | 14.3) 12.7] 13.2] 13.6 212.8{ 11,8] 10.2] 10.9) 12.2 a7 +7} 8 na | 10.3] 10.1] 10.5 10.6=39- / During 1978, only SFNB and RNB raised commori equity. SFNB raised approximately $39 million at a price of $26.00 per share compared to a book value of $23.16 per share. RNB vaised approximately $30 million at $25.25 per share versus their book value of $24.99. Of major holding companies raising common equity through June 1978, only these two Pacific North- west banks were able to do so at a price above book value. Y These common stock offerings represent the first such offerings for the Major Pacific Northwest banks since before 1971. Please see Illustration M for a yearly listing of banks and bank holding companies issuing common stock. The conclusions that one might draw from all the illustrations are that Pacific Northwest banks tend to be good earners, retain a large portion of earnings, but not enough to keep equity growth from lagging asset growth, and that they will undoubtedly have to tap the ebfiity and debt mar- ‘ kets while they can or be forced to curtail growth and/or be v forced by the regulators to increase capital. one thing that these illustrations and analysis do not explicitly show is the quality of management, assets, capital planning and operating controls. This information is restricted to the bank regulatory agencies, bank auditors and bank manage~ ment. Nevertheless, these factors can be implicitly determined by careful analysis of financial statements and ratios plus a good understanding of the local economy, bank stock market, business of banking, and personality of the individual banks.8.199, 096 04 40 TULUST ert me pots ot Tima at anton Tritt 0 or sures wes “dricey’ —Dinnoen Digidin Pura z ' “offers ‘lferinger States emninns Mate” Yield _share__value eat Fe 1s 6.0880) $2.00 (a) $ 3,08! 4.95 sont + lori Wetton Bans Forge, pe. —«3213,103 "18.815 ° Gab 64 tse en 1 Repwote Hetonal Bak of Now York n't0'(®) “3y40, 236 wii é /-4 Virginie CommonwesitnBanishstes, 1. Big) win ies 0 ee / 4 Beverly Hal Bancorp wee Tar et xi BE 3 Wyoming Bencerpration i 550" 088 0.38 1 Teun 30h HE 2 FEE anion Buxestares ne. so0,on0 $88.28 $ BAIT 3.01 7a Genican Bancshares Corporation meslooo —re.ons | * Tate 3.01 At Zions Uteh Bencorperation msyooo, 2a blot. 3.03 Nb Unionarerine, Ine 1HE2) 3540) S100 Co) 8198 E38 5 Union Gamineree Corporation oovcoo” Sorts tras 526 fd Palmer Bank Corporation Sears 30.000 “Taam 2.18 /23 The Arizona Hank foolo00 3830 a5,80 te 7") United Berks of Colorado, tn seoreco = isan 'Syrb yok Ploriga Commerc nk, I. Sooo Ta.2s) bya 1.6 72 Hawheye Bancorporetion Saovou = do-s, S86 od 729 NONE Corporation acovan scars aba 38 730 Wels Farge & Company srovoun ara) aayst Lat [id Northern States Finenelal Crporstion Sooece 18.98 tage aia ‘Total i972 CH 13 : 738 Wyoming Bancorportion 413,000 7-8 The Bank ef Tanya of Californie zovean 71S ‘Tennessee Valley Bancorp, ne 5cayeue (ages Capital Ntionsl Corperation Zaaca /@BD Gentes Benesares ofthe South ne. 00,000 MD ercett Desks of Florida, ne. ovean jay First Ineretinal Banesarety Ine. $30,000 7" Sears Bank and Teast Company vua,e0 “ota! 187 . m4 No Offerings During 1914 re oo ar.s0 Fa 7 Crocker Nations! Corortion 1,800,0 22.50 $3898 3.4 Te 81.88 7.4% HAs 069x Tou 1918 ie sre THE Nocthwst Bancorporetion 00,000 $45.00 aux 26 $30.0 Lae 8d. B. Herzen & Co, Incorporated 2,000,000 “34.00 ae uy ae Xe fad Frat city Bancorp of Texas ooo 31.00 28 32 ke ae 76 BarkAmeric, Corporation nevon) 26.378 wot 3300 He “Tota 1938 am 77S Wels Fergo & Company 2,000,000 $7.38 9.88.03 28 Bee ae $27.08 1.00" (28 Manufacturers Hanover Corporation Peso “arl3is, Caen? 15 us She erareteerstean fete ‘otal 1977 a TE BanCel Tri-State Corporation s73,ra(a) $16.28 (0) $1425 1.38 oe Aas 90 2 Firat Pennsylenia Corporation a,anovamote) “ae-s0 fe) | 3603" Poe 1: Te / § Rainier Boncorperation Tiaonlone 25280" 303 530 °: HS 2g) Lowe / § Seats Corporation Yano ae-co 3G aah “ mis i to i iels Corporation Ett a ee a) * ce BE alst ‘to June 99 a ‘2-41- For example, in the large multibank holding company banks, management, operating controls and capital planning are provided mainly by the holding company. For the others, personal visits to their branches, studying the distribution of their asset accounts and loss history help one guesstimate the quality of their assets and general thrust of their planning process. This type of quasi-analysis has lead me to conclude that Pacific North- _, west Banks are generally well run, of sound condition and possess good prospects for the future. It is assumed that they have the foresight to react to their decreasing capital trends before the regulators force them to by denying branch expansion, turning down mergers or issuing formal administrative actions. Given the rapid growth of the past four years and the favorable prospects fa for the future in the Pacific Northwest, capital demands will be greater than ever. Presently, these banks seem to be margin- ally capitalized as a group with Peoples probably being the worst capitalized. As a whole these banks possess the ability to tap the equity and debt markets as necessary. This will be necessary because, even with excellent earnings, retention has not proved sufficient to enable capital growth to keep pace with asset growth. /= 42- Chapter VII Summary and Conclusions In summary, the banking system has undergone many changes sinceit was first regulated by the government. One of.the-niost important and dramatic changes has been the reduction in capital in relation to assets. This reduced level of capital has enabled banks to better serve their customers by freeing up more assets for investments and loans. Additionally the advent of subordin- ated debt as capital has enabled banks to become one of the high- est leveraged industries. This leverage has made it possible for banks to continue to grow and serve their communities when equity markets were either unavailable or unattractive. Throughout this bank capital evolution, the three federal commercial bank regulatory agencies were also evolving into a unison regulatory body. Consolidation of the Agencies Alas not occurred but the groundwork has been laid. The Financial Insti- tutions Regulatory and Interest Control Act of 1978 provided for an enormous amount of new banking regulation and the estab- lishment of the Federal Financial Institutions Examination Coun- cil (FFIEC). This council brings together the OCC, FRB, FDIC and other major federal and state regulators into one body. The council's purpose is to insure uniformity in bank regulation and supervision where ever possible. As one of its accomplishments, it is expected that uniform capital standards will be established.=43- The Interagency Supervisory Committee, the forerunner to the FFIEC, has already implemented a uniform bank rating system. This rating system details how capital adequacy will be reviewed and rated. The next step is expected to be adoption of uniform capital standards for various types of banks (new de novo charters, national trust companies, existing banks, etc.). When capital standards are uniformly adopted, banks will Y be under increased pressure to comply. The importance of ade- quate capital planning and initiative by bank management will be ceucial if the banks are to avoid the regulators scrutiny. Pacific Northwest banks will be particularly susceptible to regulatory intervention unless they can either increase their capital growth rate or slow their asset growth rate. As a whole, the billion dollar Pacific Northwest banks have below peer group levels of capital. Part of this variance is attributed to their general good condition, relatively free from large losses, and their better than average earnings. During 1978 we saw SFNB and RNB take the lead in this regard by selling com mon stock when they could (above book value). The other banks will soon have to follow suit if they are to maintain their place v in the market. Even though the uniform capital standards were not adopted prior to writing this paper, it is hoped that the reader has learned more about where the issue of capital adequacy stands. It is futher hoped that excessive regulatory involvement will not stem from these standards and that banks can avoid being caught in the vicious circle of regulatory pressure and investor mandates.aa4- BIBLIOGRAPHY BOOKS Bank Financing Review, 1978, Merrill Lynch White Weld Capital Markets Group, 1978 Comptroller of the Currency Annual Report, 1976 & 1977 Comptrollers Handbook For National Bank Examiners, Section 303, p 1-5 Hahn, Philip J. The Capital Adequacy of Commercial Banks ; The American Press, 1966 PDIC Manual of Examination Policies, Section D, P.1 Federal Reserve Bulletin, Federal Reserve System, Monthly FIRA, Financial Institutions Regulatory and Interest Rate Control Act of 1978, American Bankers Assoc., 1978 Hempel, George H., Bank Capital: Determining and meeting your bank's capital needs, Bankers Pub Co., 1976 Instructions of the Comptroller of the Currency - Relative to the Organization and power of National Banks, 1864 KeefeBank Stock Manual, Keefe, Bruyette and Woods, Inc, N.Y., 1972-77 Mayne, Lucille $., Impact of Federal sank Supervisors on Bank Capital, New York Univ. Institute of Finance, 1972 Office of the Comptroller of the Currency Corporate Policies, Wash DC,1976 Recent Bank Closings: Hearings before the Committee on Banking and currency, House of Representatives; GPO, March 1971 Report of the President's Commission on Financial Structure and Regulation; GPO, December 1971 The Condition of the Banking System; Hearings before the Committee on Banking, Housing and Urban Affairs; GPO, May 1978 he NBSS Bank Performance Report, A Users Guide for Bankers and Examiners, Comptroller of the Currency, 1977-45- BIBLIOGRAPHY BOOKS- continued Vojta, George J., Bank Capital Adequacy. First City NB, 1973 PERIODICALS. American Banker;"Inflation's Impact on Bank Decisions About Capital Positions"; 1/9/79 do. "Supplemental Capital Tabulation of 182 of top 300 Commercial Banks"; 2/28/79 do. "Control of Profits Rather Than Growth urged for Capital adequacy" ;2/8/78 do. "Impact on Banks Capital from Inflationary Trends" ;8/28/7 do. “Banking Industry's Growth and Capital Shortage Discussed"; 9/29/78 do. “Ambiguous Regulations Regarding Capital Standards For Banks"; 11/15/78 Asher, Joe. "Keefe on Capital Ratios," Banking, Vol LXVII, April 1975 Bank Stock Weekly, Salomon Brothers, weekly Beighley, Prescott H., Boyd, John H., and Jacobs, Donald P. ,"Bank Equities and Investor Risk Perceptions: Some Entailments for Capital Adequacy Regulation," Journal of Bank Research, Vol 6, Autumn 1975 Business Week ; "Why Bank Stocks Have The Blahs," 2/12/79 p 98 do. "How they slipped the Bank Bill Through," 10/30/78 p 32 Carey, Gerald V. "Reassessing the Role of Bank Capital," Journal of Bank Research, Vol 6, pp. 165-169 cates, David C. “Bank Capital Management,"_The Bankers Magazine, vol 159, pp 113-116 Crosse, Howard D. "Capital Adequacy Revisted," The Bankers Magazine, Vol 158, pp. 77-82 Foldessy, Edward P. "Bank's Needs for Outside Capital Declines as Loan Totals lag, Profit Margins Rise," The Wall Street Journal,2/4/76 Friedman, Benjamin M. and Formuzis, Peter. "Bank Capital: The deposit-protection incentive,” Journal of Bank Research, Vol. 6 pp208-18 Fortune, "Fifty Largest Commercial Banking Companies, July 17,1978 Gallant, Richard A. "Approaches to Capital Planning Bank Research, Vol. 6 pp 173-176 Journal of Hahn, Philip J., "The Conflict in Standards of Bank Capital", The Bankers Magazine, Vol 148, No. 3, Summer 1965~46- BIBLIOGRAPHY PERIODICALS - continued Heggestad, Arnold A. and Mingo, John J. “Capital Management by Holding Company Banks," The Journal of Business} Vol. 48, 10/75 Jones, David H. "Subordinated Debt Issues--A Source of External Capital,” Mid-Continent Banker, 2/76 pp.27-28 Keefe, Harry ,. Jr. "Bank Capital Adequacy Measured by Ability to Sustain Earnings," Money Manager, 3/3/75 pp. 11-12,46 Marcus, Warren R., "Bank Capital Requirements in the 1970's- The Underwriter's Viewpoint," New York ,1971 Mayne, Lucille S., "Impact of Federal Bank Supervisors on Bank Capital" The Bulletin, N.Y. Univ. Graduate School of Business Admin, Nos 85-86 September 1972 Mingo, John J., "Regulatory Influence on Bank Capital Investment," The Journal of Finance, Vol. XxX, 9/75 pp.1111-1121 Nadler, Paul S. "Bank Capital--The Big Drought," Bankers Monthly Magazine, Vol. 91, 8/15/74, pp.11-13,17 Peacock, Ian. "The Squeeze on Capital Ratios,"_The Banker, Vol. 125 6/75, Pp. 667-673 Research, Pirst Boston Corp., Vol 5, No. 14 & 15, 4/18 & 19/79 Silverberg, Stanley C., "Bank Holding Companies and Capital Adequacy," Journal of Bank Research, Vol. 6, Autumn 1975, pp. 202-207 Simonson, Donald G. and Pace, Edmond E., "Getting Capital: What Community Banks can Do," The Bankers Magazine, Vol. 159,pp.89-96 Smith, James E. “Assessing the Capital Needs of Banking,” The Journal of Commercial Bank Lending, Vol. 56, 1/74, pp. 14-21 Taggart, Robert A., "Bank Capital and Public Regulation", Journal of Money, Credit and Banking, May 1978 The Wall Street Journal, Daily reading Watson, Justin 7, “A Regulatory View of Capital Adequacy,” Journal of Bank Research, Vol 6, Autumn 1975, pp.170-172 Young, Leah "Regulators tell Senate Panel Major Banks Undercapitlized Journal of Commerce, May 26, 1978-47- BIBLIOGRAPHY RESEARCH REPORTS, SPEECHES AND THESIS Carstens, Robert D., "The Capital Adequacy of Commercial Banks in Nebraska, 1964 -1979, Univ of Nebraska Heimann, John G., "Statement before the Committee on Banking, Housing and Urban Affairs, U.S. Senate May 25, 1978 Hocker, Rodman L. Jr., "Capital Adequacy", PCBS Thesis, 1976 Gibson, William E. "Alternatives to Explicit Regulation of Bank Capital Positions," Presented to Financial Management Assoc., Kansas City, Missouri, 10/16/75 LeMaistre, George A.. "Capital Adequacy," Presented before the Bank Study Conference, Alabama Bankers Assoc., Tuscaloosa, Alabama 9/74 Jessup, Paul F. and Bochnack, Mary. “Why Not Deregulate Bank Debt Capital?" Presented to Financial Management Assoc., Kansas City, Missouri, 10/16/75 Johnson, V.M. "The Adequacy of a Bank's Capital Funds," study by American Bankers Assoc., Wash D.C. , 1954 Marcus, Warren R. "The Challenge to banking: capital formation in the seventies," Salomon Brothers 1974 Orgler, Yair E. “Capital Adequacy and Net Recoveries From Failed Banks," FDIC Division of Research Working Paper No. 74-13 Ryon, Sandra L, "History of Bank Capital Adequacy Analysis FDIC Division of Research Working Paper No. 69-4 Scott, Henry T. "Bank Capital Adequacy - A continuing controversy" PCBS Thesis 1976 INTERVIEWS Stuart, Charles F. Jr., Director of Multinational Examinations, Office of the Comptroller of the Currency, Washington D.C. Zemke, Thomas E., Director of National Bank Surveillance system, Office of the Comptroller of the Currency, Washington D.C. SPECIAL REPORTS Annual Reports for December 31, 1977 for: Seattle-First National Bank - Sea-First Corp. 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